First published on 16th December –
The focus on operational cash management increased significantly in 2014. With the imminent ending of dollar QE 2015 has the potential for increased volatility in FX markets and a drive for greater control over sovereign currencies. All of which will put even more pressure on the Treasury function forcing an even bigger focus on transparency across cash operations.
Cash flow is central to the success of any business. With organisations making and receiving large numbers of payments and receipts each day, often from multiple banks and across multiple jurisdictions, Treasury teams need confidence with intra-day and near term cash forecasts.
Having a 360-degree view of cash is an imperative for many businesses. Cash must be accurately tracked across a number of different timeframes for this to happen: on an immediate intra-day basis, on a near term basis, and beyond.
Intra-day accuracy in cash forecasting comes from being able to determine your real balances at the beginning of the day at each bank, and at asynchronous checkpoints during the day, knowing what payments and receipts are already in the pipeline / committed, and what effect they will have on that balance as the day unfolds. This includes visibility of all payment movements: distinguishing payments that have been executed by the bank, authorized payments that are still to be bank executed, payments that are in the pipeline and queued within your internal operations, and the queues of invoices becoming due for settlement. All of these payments will have an effect on the overall intra-day cash balance of an organization but the treasurer needs to see where these balances are emerging, how they impact bank facilities and stay within limits, and the emerging pattern and timing of sweeps.
Better connection of payment and receivables processes enables firms to more effectively manage their intra-day cash movements, such as delaying payments or moving money from one account to another, and adds a greater degree flexibility.
On a near term basis organisations must have sufficient visibility to action regular, one-off cash movements – such as payroll days – and understand their impact on the balance sheet. This includes being able to plan for any delays that might arise from transferring money from another bank or region and funding transactions in different currencies.
This is the bottom-up, 360-degree approach to managing cash. It starts with the beginning-of-day balance of the organisation, what will be the balance at intra-day points, what will be the balance at end-of-day, and what balance is required to manage cash movements the following day, in two day’s time, or in one week. The operational treasurer must have a degree of flex in their budget and change the projections for cash regularly to reflect any changes in the business.
Beyond that, longer-term cash visibility must take account of all ebbs and flows in revenues and costs that can impact a business on a weekly or monthly basis. To budget cash effectively, firms must understand their minimum and maximum expected balances throughout the month, taking into account what these balances looked like in the past and how they have changed in relation to how the business is evolving. For example, changes in the product mix and routes to market, credit terms may have changed, or the supply chain process including shipping patterns may have changed. All of this information impacts cash flows and needs to be accurately expressed in future balance projections for the firm.
At the same time however firms also need to take a top-down approach to managing their cash. They must be able to view cash in terms of their different operational centres and distribution units; in terms of how they want cash to be managed in different currencies and regions; what currencies are used for supply chain and customer settlement; the ease with which cash can be repatriated and readily transferred to fund another parts of the operation; and local and regional bank facilities.
While accurately managing cash in these different ways is critical to business success, Treasury professionals are constrained by the lack of real-time visibility across their entire organizations, particularly when it comes to multi-currency and multi-jurisdictional cash flows. This is highly problematic.
In order achieve accuracy and visibility firms must lean on technology to enable them to better link up all of the different parts of the cash event process. So, knowing the balance at the start of the day and linking up to payables and receivables systems, having resilient connectivity to banks and the authorization processes that releases payments, being able to automatically reconcile positions, and linking back to the cash book or general ledger. The month-to-month running of cash can be done using spreadsheets, but the to-the-minute cash positioning of a business reveals the firm’s greatest need in terms of technology in the day-to-day operational control of cash.
Reliable bank connectivity is also an increasingly important factor, particularly in an ever international and globalized marketplace. The practicalities of linking to banks and the reliability of bank connectivity vary from region to region and from bank to bank. In many cases firms end up with a patchwork of links to banks, some direct and other indirect, which in a high volume transaction environment needs to be managed with precision and have the flexibility to evolve as bank systems change and upgrade.
An operational Treasurer must know what the cash position is where the bank’s systems are unavailable or have suffered an outage. This is like the dark side of the moon; you need to know precisely the point at which your orbiting satellite emerges so that you can confirm or reset the course from your central command post. The resilience of a firm’s cash visibility lies in the independence it has from bank systems together with the ability to check point precise reconciliations against those banks systems when they were last available.
Technology can be the facilitator here in enabling all cash processes to be monitored and ultimately controlled through a centralized workflow despite the underlying events that drive an organizations cash processes sitting inside one or more ERP systems and other proprietary systems.
The right operational cash infrastructure tells you for each bank and account, where you are, how you got there and where you are going at any time during the day. Operations treasurers have immediate access to more timely and accurate information that allows them to forecast and revise their cash flows on a daily and intra-day basis. With better insight into future availability of liquidity across their operations technology can help enhance supply chain workflow relationships, cut the cost of working capital and demonstrate precision over their management of cash.
Paul Ormrod, CEO